It has been said in investment circles before; oil is the money machine. It’s obvious that many in certain Middle Eastern countries know this is true; there are too many photos of palatial mansions and silver-plated Cadillac’s. This statement is also well known by investors in the oil futures market. The sad thing is that many who attempt to venture into the market of oil futures do so ignorantly and the results from their investing mistakes are usually devastating.
There are many investment options in different kinds of oil, based on differences in chemical and physical makeup. These differences lead to differences in price, although each type of oil tends to follow the track of the market. Each moves independently because of the differences in oil, but globally all oil prices move in the same direction. This sets in motion the parameters in oil futures for profit.
There is an analytical relationship between the price of one type of oil and another; in other words, successful traders find it possible to profit in financial markets from a certain correlation. This means that when the price of one variety of oil goes up by a certain amount, the other types will tend to move relative to the price change of the first oil. In the oil futures market, deviations in this formula create profit generators known as spreads.
A spread in oil futures takes advantage of, and makes a profit from, a price difference which is either too big or too small when compared to its pair. For instance, the price difference between Oil Company A and Oil Company B has been around USD 6 for the last 2 years, but at the end of 2005 this price difference was USD 14.
To learn how to invest correctly and profit from this spread in oil futures, you have to buy the lesser priced product and sell the higher priced product at the same time. When the difference in prices is back to its regular level, you turn around the position again. The term for this tactic is arbitrage; profiting from temporary price differences in the oil futures market.
Remember, however, that spreads and their risk reward ratios tend to move relative one to another. During the period 2002 to 2004, the average price difference between Brent and Dubai oil was around USD 2. The reason for this level was that the oil price was much lower than it is now. Thus, oil futures trading is similar to other commodities trading in that knowing a little, but not fully, about the parameters involved can be a dangerous thing, especially without the aid of a proven commodity trading solution.
Success is dependent on a variety of factors. Familiarity with commodity trading charts is paramount. Secondly, it is necessary to know about financial markets and how they operate, especially regarding the specific commodity you intend to trade. Finally, it is extremely helpful to have a proven system such as commodity trading info optimized with candlestick signals for evaluating the market.
The most-used or obvious way to support your decisions is by using technical analysis tools. The good news is that everybody can become an expert. But as with any endeavor; experience and training, coupled with the best of strategies, separate the successful traders from the rest.
0 Comments:
Post a Comment
<< Blog Home